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Is the Oil dip presenting another buying opportunity in Sasol?


Sasol Limited (SOL)

After hitting a one-week knock as demand concerns and Covid-19 related cases rose; oil prices opened 3% higher on Monday with the USD weakening.

From hitting a low of $64.70, Brent crude gained strength to $67.75 a barrel, representing a 3.9% increase, and U.S. West Texas Intermediate (WTI) crude oil futures jumped to $64 a barrel. 

Volatility session

With the easing of travel restrictions globally, oil prices fell for seven consecutive sessions, taking prices to the lowest level since May 2021. The U.S. dollar rallied behind U.S Federal Reserve (Fed) tapering discussions and the currency continued to gain value, leaving commodities such as gold and oil under scrutiny. During the third week of August 2021 oil saw a decline.

Oil is set for another volatile session as the Delta virus stands strong, forcing countries like China to impose Covid related restrictions, threatening the demand. According to Jim Ritterbusch, who is the president of Ritterbusch and Associates, "Although the oil complex has generally been able to shrug off strength in the stock market, the bullish combo of increased risk appetite and significant weakening in the U.S. dollar indices represents a potent mix that oil has been forced to recognize"

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Sasol Limited (SOL)

On Monday, South African crude oil giant Sasol rebounded by 9% after plummeting to its five-month low with gains continuing through Tuesday by 6%, and WTI rising 2.4% and brent rising 2.4%.

Jeffrey Currie, Head of Commodities Research at Goldman Sachs, estimates oil price to reach $80 a barrel, with Craig Erlam, an analyst at Oanda, expressing that if WTI breaks the $70 mark; it would be "a break of which could be very bullish ".

Sasol's share price hovered between R200 and R250 after a heavy recovery of R80 per share due to uncertainties surrounding Covid-related restrictions.

Organization of the Petroleum Exporting Countries (OPEC) plans to slowly restore production to the market by next year; while keeping this year's output low. But despite the OPEC low production agreement, Sasol returned into profit within the period of low production, reporting an increase of over 100% on earnings before interest and tax (EBIT) of R16.6 Billion compared to a R111.92 Billion loss the previous year. Basic, headline, and core headline earnings increased by over 100% into profit from a double-digit loss the previous year.

The company reported an increase in the group's chemical businesses in the American, Eurasia, and African regions, while fuels slightly declined from R62.5 billion in 2020 to R60.6 billion for 2021.

"The Delta variant will prove to be a transient event, and U.S. producers will retain their newfound discipline, as the drivers of our bullish view shift from cyclical demand impulses to the structural binding constraints of underinvestment in supply that were only accelerated by Covid-19." Currie expects...
As Sasol's finances turn into profits, the company aims to make dividends restoration its key priority.

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The monetary policies of central banks trying to fight inflation through tapering may bring expectations of short-term price variability. Uncertainty surrounding Covid-related measures continues to dominate the market, particularly in oil prices and the U.S. dollar, which are expected to face short-term volatility and could open up trading opportunities.

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Sources – EasyResearch, JSE Sens, Sasol Limited, Barron's, Reuters

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